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Sterling Traders See Short-Term Upside Potential

The GBP/USD has enjoyed a boost of late, fueled in large part by Prime Minister Theresa May’s calls for a snap election on June 8, 2017. That May has backtracked on a pledge not to hold elections before 2020 did not hurt her standing in political circles. In fact, opposition parties welcomed the call for a general election and the PM is convinced this will help with Brexit negotiations.

The announcement boosted the GBP against other currencies, including the USD, EUR, JPY, and others. In fact, the GBP/USD pair rally towards 1.29 before retreating. By the end of the week, currency traders helped to drive the GBP/USD pair 2.3% higher. If the GBP/USD continues trending higher it could move towards the September 2016 high of around 1.3421. For the year to date the GBP/USD pair has appreciated from 1.2349 to its current level of 1.2781, for a gain of 3.5%.

Trading activity on the GBP has largely been bullish. Speculators are encouraged by UK economic indicators, and the apparent resilience of the economy. However, analysts caution that the short-term trends of the GBP/USD pair indicate that it is overbought. In terms of support levels for the currency, 1.2700 appears to be an important handle. While sentiment is generally supportive of short-term optimism, recent UK data releases are cause for concern.

In March, there was a 1.8% decline in retail sales. The consensus forecast among analysts was a drop of 0.2%. Annual growth declined from 3.7% to a paltry 1.7%. Over the course of 3 months, retail sales figures showed a decline of 1.4% with ongoing weakness across the last 4 releases. The BOE anticipates a slowdown in retail sales in 2017, and pressure is being brought to bear on real income levels. The reason for this is inflation. Multiple other economic indicators are going to determine which direction the GBP/USD pair moves. These include CBI distributive trades, GfK consumer confidence, and preliminary first-quarter gross domestic product results.

ETX Capital spread betting analysts point to the CFTC (Commodity Futures Trading Commission) report from Friday, 21 April which indicates that most trading activity on the GBP is short-term long positions. As at Wednesday, 18 April, there were 16,477 long holdings of GBP futures and 10,066 short holdings of GBP futures contracts. But when we extrapolate this data to the broader currency trading market, the net short positions are now at 99,490 contracts. The pyrrhic rise in the value of the GBP lately cannot last indefinitely. Brexit-related realities are looming large.

The rise in the value of the sterling pushed it to a 6-month high against the greenback. This has jolted the FTSE 100 index which typically derives its revenues from foreign-based earnings. The all share index plunged from 7,327.59 on April 13 to 7,114.36 on Wednesday, April 19. Since then, there has been a consolidation and appreciation of the sterling towards its current level of 7,266.62 on Monday, April 24, 2017. The FTSE spiked on the news that the French centrist politician, Macron came out ahead of far right-wing candidate Marine Le Pen. Much the same is true of bourses across Europe, and this helped to stabilize the EUR against competing currencies.

Bank of England policy is a little uncertain now. For starters one of the MPC members, Michael Saunders presented the prospect of an interest rate hike on Friday, 18 April. He was addressing the Federation of Small Businesses when he made the comments. ‘A modest rise in rates would imply that considerable stimulus remains in place, helping to support output and jobs.’ As someone who may vote in favour of a rate hike, Saunders is now considered one of the MPC hawks. An interest rate hike would be beneficial to the GBP, in that it would increase demand for the currency.

This was posted in Bdaily's Members' News section by Jennie Campbell .